Comments: How Central Banking magnifies the Crisis and ensures Depression

Yes, and this bailout syndrome goes way back, long before 2008. You can read about the endless bailouts in the '70s in G. Edward Griffin's "Creature from Jekyll Island" (http://www.amazon.com/Creature-Jekyll-Island-Federal-Reserve/dp/091298645X/ref=sr_1_1?s=books&ie=UTF8&qid=1406030788&sr=1-1&keywords=creature+from+jekyll+island).

Also, take a look at the following chart of the Dow Jones measured in terms of gold:

http://www.sharelynx.com/chartstemp/DowGoldRatio.php

Note that's a logarithmic chart, so the huge swings you see there accurately reflect the real volatility.

If you scroll down to the second chart, you can see that 1913, i.e. the institution of the Fed, was a big turning point. The entire character of the chart changes after that point.

The Fed's monopoly on money financed all sorts of government misdeeds, starting primarily with the their involvement in World War I, and the subsequent booms and busts in the money supply have profoundly affected financial markets, leading to a cascade of alternating cycles of manic malinvestment followed by depressive corrections.

Also, by the looks of things, those cycles are getting larger, not smaller. It's like a self-amplifying feedback loop with no dampening factor whatsoever.

Posted by Patrick at July 22, 2014 07:16 AM

Just as a footnote, I once did a rough measurement of that central trendline, and it corresponds to a 2% compounded annual rate of increase.

So, very roughly speaking, the investments represented by the Dow Jones have tended to appreciate 2% per year against gold. Gold is a physical commodity whose purchasing power over millenia has been as constant (flat) as one can reasonably expect of any commodity. So the 2% rate of return is essentially a real rate of return in terms of actual purchasing power. I'm sure one could use other baskets as a denominator, but I doubt the 2% figure would change very much.

If there is some feedback loop leading to those lower lows in 1930 and 1980, it is important to note that no feedback loop can amplify to infinity. The laws of physics, and the x-axis itself, guarantee that the cycle *will* be broken. I think the deciding factor is the advent of free market money, along the lines of what Ian Grigg and others are working on.

Posted by Patrick at July 22, 2014 08:12 AM

Just on that last point:

>> If there is some feedback loop leading to those lower lows in 1930 and 1980, it is important to note that no feedback loop can amplify to infinity. The laws of physics, and the x-axis itself, guarantee that the cycle *will* be broken.

I strongly recommend readers to grab a copy of Peter Senge's _The Fifth Discipline_ which is how feedback loops work in business.

Posted by (Iang) The Fifth Discipline by Peter Senge at July 22, 2014 08:47 AM
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